What a Difference a Day Makes!

Boy did the markets save Geithner's ass today.  How long they will kiss it remains an open question.

There are two poles to this "toxic trash" debate: those who believe the trash is worthless (Krugman) and those who think it undervalued (Geithner).  I side with Geithner and hope his plan works.  The worthless camp ignores the fact that the "subprime" CDOs  et al. are securitized by real property.  Surely this real property hasn't lost all it's value?   Granted, the underlying assets (homes) have dramatically dropped in value.  But they haven't dropped 100%.  And even in the case of CDOs with foreclosured mortgages  the  CDO owners generally are in the front of the line when it comes to disbursement of foreclosure proceeds.  Furthermore, the default rate in the bundles of mortgages (hundreds even thousands) that make up CDO's  is nowhere near 100%.  That means that CDOs still have some sort of revenue stream; it's just the uncertainty surrounding the future default rate that makes the CDO's  untradeable.     The level of uncertainty surrounding the return on any given CDO prevents investment.  Thus you are left with a CDO that has physical and monetary value but no price.  This is largely a problem of faith, and is not one necesarily rooted in the lack of any value in the securitized assets comprising the CDO.  

What Geithner has that Krugman lacks is faith in the ability of the market to work out the value of the underlying securitized assets.  Krugman thinks that the market cannot work out the value of CDOs even though they are securitized by physical property and revenue streams from current mortgages.  It is impossible for Krugman for there to be a market solution to the market's crash.  For Krugman derivative trading is discredited.  I disagree.  Properly regulated derivatives like CDO's are useful because they ameliorate risk and free up capital.  This crash is like most others, a product of excess and not the result of some innate flaw in derivatives.  No one blames the 1929 crash on innate flaws in the concept of stock shares.  While I don't know if Geithner's plan will pan out, I do think Geithner's right to have faith in capitalism's ability to scavenge itself.  Capitalism is first a predator but second a scavenger. 

Well Said

http://moetkacik.tumblr.com/post/88269730/ugh

Tone Deaf

I work on Wall Street and have gotten pretty jaded at the level of stupidity, arrogance and greed that occurs.  Of course its not unique to Wall Street, Wall Street just has more money than most stupid, greedy, and arrogant communities and individuals.  But the fact that AIG has the balls to sue the U.S. government, its biggest stakeholder, over tax refunds, blows my mind.  How tone deaf can you get?  Wow.

Where are all the AIG Contracts Buried?

When do we get to see the AIG contracts?  As a lawyer I'm really curious as to their terms, who negotiated them, and what the parties knew when they were negotiated.  If they were negotiated when times were flush I'm inclined to be more forgiving, if negotiated when things were going down the crapper then Cuomo's fraudulent conveyance argument might have some bite.  Show me the contracts, I've already seen the money.

Breach

AIG finally broke down and released the names of its counterparties.  Nothing too shocking.  The usual suspects domestic and international.  Still wondering why we're even bothering to keep the middleman alive.  

On another note, every employment contract I've ever seen, and I've seen a few at this point, make bonuses discretionary.  What gives with these AIG contracts?  I'm a big believer in the sanctity of contract, and I think one of the reasons that the dollar has managed to stay relatively strong in this mess is the fact that our Federal Court system is a relatively unbiased forum for settling contract disputes.  Investors know they can enforce their rights in the U.S., which is more than you can say for China or Russia.  But the fact that AIG was allegedly writing contracts for such a large amount of non-discretionary bonuses is suspicious.  When were these contracts written and what did signatories know about the state of AIG's balance sheet when they signed them?  There may be legitimate ways to void these contracts, at least as to the bonuses, that don't tread on the sanctity of contract.  Fraud and public policy comes to mind.  After all, AIG would have gone under and wouldn't have been able to pay these bonuses without taxpayer money.

China to U.S.: Drop Dead

The Chinese Premier is concerned about the safety of U.S. Treasuries?  I don't have time to blog on this right now but want to say one thing.  The last time I checked the U.S. had never in its history defaulted on its bond issues.  As a matter of fact, one of the reasons Hamilton lobbied so hard for the Constitution was in order to establish strong credit for the U.S.  During the period from the ratification of the Constitution and now, China has seen multiple governments that have defaulted on their debt multiple times.  So while I'm happy that China is finally at the capitalist party, and gee they have a nice outfit, I think they've had a little too much to drink and are starting to talk smack that sounds somewhat silly given their track record.

Boy am I Glad That's Over

And lo, the banks were profitable again and money was lent as manna from heaven and the markets sighed deeply and began their weary climb back up.  Would you like to buy a bridge?  I don't believe anything those banks say about their balance sheets right now, they have powerful incentives to lie about it.  I sincerely hope I'm wrong and that we've turned a corner with the economy in terms of the credit crisis but I find much of the optimism surrounding the Dow's recent uptick ill founded.  History is littered with defunct financial institutions that gave rosy projections until their last breath.  As a matter of fact, isn't that what we saw with Lehman and Bear?  Don't believe the hype.